India GDP Q1 2018

India: GDP growth accelerates again in Q4 FY 2017, beating expectations

In the fourth quarter of FY 2017—which ran from January to March 2018—the Indian economy continued to strongly emerge from the downturn that followed the abrupt demonetization of November 2016 and the road bumps caused by the introduction of the Goods and Services Tax in July 2017. GDP grew a better-than-expected 7.7% in year-on-year terms in Q4 FY 2017, the highest reading in nearly two years and above the revised 7.0% increase recorded in Q3 FY 2017 (previously reported: +7.2% year-on-year). The figure was above the 7.3% expansion that market analysts had expected.

Domestic dynamics underlined economic growth in Q4 FY 2017. Private consumption growth accelerated to 6.7% year-on-year in Q4 from 5.9% in the October-to-December period. Moreover, with the government loosening its purse strings, its consumption increased by a significant 16.8% in Q4 from 6.8% in Q3. Meanwhile, a 14.4% increase in fixed investment further drove growth in Q4. This also represented an acceleration from Q3’s 9.1% expansion and was the highest reading in seven quarters.

The external sector, however, weighed on overall growth. Exports of goods and services expanded a measly 3.6% in Q4 FY 2017, representing a deceleration from the 6.2% expansion in the October-to-December period. Imports, meanwhile, remained buoyant and recorded growth of 10.9% in Q4. This represented an acceleration from Q3’s 10.5% expansion and the fastest growth in three quarters. As a result, the external sector detracted 1.2 percentage points from economic growth in Q4, more than the 0.9 percentage-point deduction in Q3.

All in all, the Indian economy expanded 6.7% in FY 2017, a slowdown from 7.1% in FY 2016. This fiscal year, activity should pick up somewhat due to stronger private consumption growth. Moreover, an earlier monsoon than normal could boost agricultural output. However, there will be choppy economic waters to navigate, posing risks to the outlook. The Reserve Bank of India is likely to react to a stronger economy and accelerating inflation with tighter monetary policy over the course of this fiscal year, which could take some steam out of the economy’s sails. Moreover, high oil prices will stoke imports because India sources most of its oil from abroad, putting pressure on the current account balance this fiscal year and subtracting from growth.

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